By Dr. Bart DiLiddo for VectorVest
In preparing to write this essay, I read last year's "Year Ahead" essay dated December 28, 2012. One of the things I said was, "As usual, I surveyed a number of financial sources to get their predictions and, as usual, their bias was bullish." I could say exactly the same thing this year, so there's nothing new to report on the consensus outlook.
But there was one surprise: last year's predictions were not nearly bullish enough. According to Business Insider, the predictions of 9 top-rated Wall Street analysts for the S&P500 2013 year-end close ranged from 1,425 to 1,665 with an average of 1,540, indicating a gain of 9.8%. Ha, the SPX closed above 1,540 on March 6th. It closed above 1,665 on May 17th, and hit 1,844.89 at 9:33 this morning for a gain of 29.36%.
So what are they saying about 2014? They're predicting the S&P500 would close 2014 anywhere from 1,850 to 2,075 with an average of 1,949, for a gain of about 5.6%. That's interesting. The Pros are less bullish this year than they were last year. Nevertheless, all of them predicted higher average earnings per share for the S&P500 stocks. Therein lies a tale.
It is our belief that a Bull Market Scenario prevails as long as S&P500 average earnings per share are rising. We document and analyze these data in the Investment Climate Section of our E-newsletter, the VectorVest Views. This information is also displayed in our Market Climate Graph shown below.
The upper portion of the graph shows the VectorVest Average Earnings per Share, EPS, for the S&P500 stocks and the lower portion shows the VectorVest Earning Trend Indicator of the EPS data. Note that both data sets bottomed on May 15, 2009, two months after the market bottomed on March 6, 2009. The remarkable thing about this graph is that the earnings trend indicator has remained above 1.00, denoting a Bull Market Scenario, ever since January 29, 2010. Also note that the earnings trend indicator hit a low level of 1.04 on March 15, 2013 and stayed there until April 19, 2013; then it began to rise. This, too, is remarkable.
Looking back even further, you’ll see that the S&P500 EPS and EPS Trend Indicator have similar trajectories from their low points of May 2, 2003 and May 15, 2009, but the monumental crash of 2008 led a far steeper and higher EPS ascent from their respective bottoms. The Bull Market Scenario of 2003 - 2008 lasted four years and nine months while the Bull Market Scenario of January 2010 has lasted three years and 11 months so far. So I would say it's a pretty safe bet that a bull market will prevail for at least another year.
The S&P500 WatchList shows an average forecasted earnings growth rate, GRT, of 9 %/yr. This is a lot better than the 5.6% the Pros are predicting, so I would say the market is going to be pretty good in The Year Ahead.
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